Biden’s spending plans may not impact inflation, economists say

With President Joe Biden this week signing the $1.2 trillion infrastructure bill and the House on Friday passing the the $1.75 trillion Build Back Better plan, questions are being raised about whether an increase in government spending could drive up inflation. After all, the measures will funnel a substantial amount of federal funding into an economy already seeing the fastest rise in consumer prices in 30 years. 

Some economists say fears about the bills’ impact on inflation are overblown. The main reason: Government spending would be spread over a number of years, beginning in 2022 — a point when supply-chain issues currently pushing up prices will likely have subsided.

“The timing is really important — that money will only start flowing into the economy maybe in the end of next year and in 2023 and on,” said William Foster, vice president and senior credit officer at Moody’s Investors Service. “We think inflation will moderate by the middle of next year. By then, the supply-chain issues will work themselves out.”

In the case of the infrastructure bill, the $1.2 trillion will be spread over five years. The social spending plan, which hasn’t yet been passed by Congress, would tackle issues like climate change and child care over 10 years.

Foster also noted that the Build Back Better Act would pay for itself by boosting taxes on the rich and corporations. That would avoid adding to the federal deficit, cushioning its inflationary impact.

On Thursday, the Congressional Budget Office said the Build Back Better Act would increase the deficit by more than $367 billion over 10 years — but that estimate does not include revenue that could be generated from increased IRS enforcement, which the CBO suggested would be $207 billion.

The legislation “is not supposed to have a material impact on the deficit,” he said. “That results in a more balanced impact on the economy.”

Some economists have also said they believe the tide of government spending could actually provide some relief in the long term. In a September letter, 17 Nobel laureates — including Joseph Stiglitz of Columbia University and Robert Shiller of Yale — said they believe the spending plans “will ease longer-term inflationary pressures” because investments in things like child care and broadband could help people get back to work and boost productivity.

The counterpoint, articulated by other economists including Lawrence Summers, is that stubbornly high prices are likely to persist for the foreseeable future as the economy overheats. Under this view, while inflation is already affecting a wide range of goods and services, a rapid surge in wages could cause employers to pull back on hiring. Also troubling are signals that suggest consumers now expect prices to keep rising — expectations that can hurt economic growth as people look to economize and trim their spending.

“While an overheating economy is a relatively good problem to have compared to a pandemic or a financial crisis, it will metastasize and threaten prosperity and public trust unless clearly acknowledged and addressed,” Summers, once a top economic adviser to former President Barack Obama, wrote in an opinion piece this week in the Washington Post.

But Summers also told The Washington Post in an interview that he doesn’t believe the bills could lead to an inflationary impact. “I think conservatives exaggerate pretty badly the inflationary consequences,” he noted. “This bill is less spending over 10 years than we’ve had over the last year.”

Manchin: “I’ll have to check on that one”

Mr. Biden has made a similar argument in promoting his spending bills. On Friday, he said the plans will “lower inflationary pressures on our economy.”

Senator Joe Manchin, a Democrat from West Virginia and a key vote as his party lumbers to get Build Back Better over the finish line, on Tuesday said his constituents are “mad” about inflation. 

“A gallon of milk is now $4 in many places. It’s taking a toll. And I hear it when I go to the grocery store or if I go to the gas station,” he said, according to The Hill. 

Asked about the Biden administration’s argument that the spending plans could lower inflation, Manchin said he hadn’t heard any specifics. “I’ll have to check on that one,” he said.

To be sure, some economists are also expressing concerns about the spending bills’ impact on inflation. “The Build Back Better plan will provide a bigger near-term boost to demand than supply,” said Capital Economics in a Friday research note. “At a time when inflationary pressures are building across the economy, that risks adding further fuel to the fire.”

Stimulus and inflation

More certain is that inflation, even if it eases next year, is for now weighing on consumers’ purchasing power, with wages on average failing to keep up with accelerating prices for everything from gas to food. Consumer prices last month rose 6.2% — their biggest jump in more than 30 years — thanks to a constellation of issues.

Among those factors are the direct cash payments that bolstered household finances during the pandemic. The three rounds of stimulus checks and enhanced pandemic unemployment benefits, which began under former President Donald Trump, gave many Americans a financial boost and kept millions from hardship.

Yet as people got vaccinated earlier this year and were eager to spend that extra cash, they were stymied by supply-chain disruptions. That demand, combined with limited supplies, was a recipe for higher inflation.

Economists predict that inflation should ease at some point next year, perhaps as early as the second quarter of 2022, as supply-chain issues are resolved. The infrastructure bill could also help break up the logjam of products because it will invest in freight rail, highways and other transportation issues, experts said.

“Money, if it’s well spent, will help address these bottlenecks and increase the productivity of the economy,” Foster of Moody’s said. “That ultimately should contribute to higher productivity and help moderate inflation.”

Of course, there’s a major caveat: If the supply-chain issues don’t ease and inflation doesn’t subside, such forecasts would need to be reassessed, Foster added. 

“The big question we don’t know is what the environment will be like at the time when it starts to flow through into the economy,” he noted. If inflation isn’t transitory and people don’t return to work, he added, “Then, yes, it can have an inflationary impact.”